Plug Earnings Q3 2015 Miss: Why You Should Still Keep It On Your Radar

  • Plug Power shares have been badly hammered after the company posted mixed Q3 2015 results.
  • Plug Power reported healthy revenue growth but a worse-than-expected loss.
  • The cost of replacing older unreliable GenDrive units is responsible for the loss.
  • Plug Power, however, is likely to finally become profitable as its newer more reliable GenDrive units become mainstream. This makes the company's shares a good long-term bet for bold contrarian investors.

Plug Earnings Disappoint

Hydrogen fuel cell manufacturer Plug Power (NASDAQ:PLUG) has posted mixed Q3 2015 results that easily topped revenue expectations but missed on the bottom line, sending the shares diving 19.45%. Plug Power reported revenue of $31.43 million, up a healthy 58.1% Y/Y and handily beating its own guidance of $30 million and topping consensus analysts’ estimates of $30.7 million. This marked the first time Plug Power topped revenue estimates. The healthy revenue growth was facilitated by a huge rise in service revenue which nearly doubled to $13.4 million compared to the prior year period.

The company’s bottom line, however, was a different story altogether. Plug Power reported net loss of $10.2 million, or GAAP EPS of -$0.06, which was $0.01 worse than estimates. Ironically enough, cost of service revenue of $16.2 million was primarily to blame for the worse-than-expected loss.

Plug Power reported that it realized revenue from 1,200 GenDrive units during the quarter, and finished the quarter with a total installed base of 9,000 units.

Under different circumstances, the investing world would have been cheering Plug Power’s latest results due to its healthy revenue beat. The company’s chief executive Marsh has in the past been accused of over-promising and under-delivering after the company posted a series of revenue misses. But expectations had been raised to fever pitch after Wall Street Forensics analyst Matt Maragolis pumped up the company’s recovery in this Seeking Alpha article. Plug Power shares had at one point rallied as much as 20% after Matt’s report, and it was only natural that investors felt disappointed that the company was still unable to turn a profit.

Service Gross Margins in Focus

Negative service gross margins is what is really eating up Plug Power’s bottom line. The company posted $18 million in product revenue, and $15.1 million in cost of product revenue, implying that the product segment is solidly profitable. The service revenue segment, however, continues to be impacted by replacement costs of sub-standard fuel stacks for the company’s older GenDrive products.

Plug Power decided to bring fuel-stack production in-house after Ballard Power Systems (NASDAQ:BLDP), the company it used to outsource fuel-stack production to, persistent stack failures. Plug Power now focuses on building GenDrive products with low power stacks and longer product cycles. New units feature diagnostic kits that gather information from the fuel stacks and relays it to the command center thus allowing potential failure points to be fixed. The improvement in service gross margins, therefore, is likely to become a gradual process as Plug Power phases out older unreliable units.

Why You Shouldn't Write Off Plug

All of that said, the fact that Plug Power reported healthy revenue growth is reason enough to become optimistic about the company. The product revenue segment is solidly profitable, and with the company’s newer products gaining more acceptance due to better reliability, this could accelerate growth even further. Investors should therefore keep an eye on the service revenue segment for signs of contracting losses. If Plug Power is able to progressively lower its service revenue losses over the next 2-3 quarters while revenue keeps growing at a healthy clip, then consider it for your portfolio.

But as things stand right now, there is just too much pessimism hanging around the company and its ability to move from the red to the black. Short interest in the company’s shares remains high and is unlikely to change significantly until the company can demonstrate a clear path towards profitability. For bold, contrarian long-term investors looking to hold the shares for at least 2-3 years and who can overlook their volatility, consider buying the battered shares.

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Comments on this article and PLUG stock

I liquidated PLUG after CC. I like Plug Power, but its clear that the bottom line is not being managed and the CEO needs to take accounting classes to learn of the interactions between Gross Margins, Marginal Costs, and increased production volume. The lethal leaseback issue must be resolved today. All leasebacks should stop today. A new CFO should be found quickly. The leasebacks are drying up the unrestricted cash of Plug and are leading to operational shutdown in Latham and/or new stock issues. There is no time for delay.
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